On October 20, 2016, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) jointly issued important new guidance that shifts the DOJ's policy regarding agreements relating to the hiring and compensation of employees2. Henceforth, the DOJ intends to criminally investigate and prosecute naked employee wage-fixing and no-poaching agreements.3

Agreements among employers to restrict hiring or fix the terms of employment can be anticompetitive, because they can result in lower wages or benefits for employees and harm to consumers in the form of reduced output. But, the agencies' impromptu classification of wage-fixing and no-poaching agreements as hardcore criminal violations lacks a basis in case law and ignores well settled principles regarding the establishment of "per se" antitrust offenses, as well as the agency's own analytical framework for the joint purchasing of inputs. These shortcomings open the door to important defenses for a company faced with an allegation of wrongdoing with respect to employees.

DOJ and FTC Antitrust Guidance

The FTC and DOJ published their Antitrust Guidance for Human Resource Professionals in response to an Executive Order issued in April 2016.4 The Executive Order was designed to "protect American consumers and workers and encourage competition in the US economy. "5 In response, the DOJ and FTC guidance declared that "[n]aked wage-fixing or no poaching agreements among employers . . . are per se illegal under the antitrust laws" and that "[g]oing forward, the DOJ intends to proceed criminally against [such] agreements."6 As discussed below, however, this declaration lacked a sound foundation.

A. DOJ's Guidance Lacks a Jurisprudential Basis

The agencies' principal rationale for recasting wage-fixing and no-poaching agreements as per se illegal criminal offenses is that such agreements are "irredeemable" and bereft of any competitive virtue.7 This statement is conclusory, however, and lacks the jurisprudential foundation required to establish an offense as a per se–let alone criminal–violation. Because the per se rule forecloses inquiry into the competitive justifications or effects of a restraint, the Supreme Court has strictly limited its application to conduct that is "manifestly anticompetitive,"8 and "lack[s] . . . any redeeming virtue."9 Furthermore, the Court has held that "[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act."10

Wage-fixing and no-poaching agreements are unlike well-trodden offenses such as price fixing, bid rigging, and market allocation where the effects are well-known. In fact, the continuing uncertainty in this area is illustrated by In re High-Tech Employee Antitrust Litigation11, a recent decision addressing antitrust claims involving no-poaching agreements for skilled labor12. Although the court denied the defendants' motions to dismiss, it explicitly left open the question of whether the per se rule or the rule of reason applies.13

The DOJ itself has frequently analyzed wage-fixing and no-poaching agreements under the rule of reason. For example, in 2013, the DOJ sued eBay alleging that it had entered into a no-solicitation and no-hiring agreement with Intuit.14 There, the DOJ claimed that agreement was either per se unlawful under Section 1 of the Sherman Act or, in the alternative, an "unreasonable restraint of trade . . . under an abbreviated or 'quick look' rule of reason analysis."15 In 2007, the DOJ had been even weaker in its claims against the Arizona Hospital and Healthcare Association (AzHHA), alleging that AzHHA established the rates agencies could charge hospitals for temporary nurses.16 There, the DOJ made no mention of per se illegality and, instead, undertook a full effects analysis under the rule of reason.17 In fact, the only case where DOJ relied exclusively on per se treatment was against Adobe, but that case was resolved on a Stipulation and Final Judgment filed at the same time as the Compliant, without ever being tested in court.18 And, DOJ was able to cite only one prior consent decree and an inapposite Circuit Court case as authority for its per se allegation.19 Thus, the DOJ lacks a jurisprudential foundation–or even consistent allegations–to conclude that wage-fixing and no-poaching agreements are per se criminal, as announced in the new guidance.

The agencies' reclassification of wage-fixing and no-poaching agreements also disregards fundamental economic principles applied in analogous antitrust situations, such as joint purchasing. The courts and antitrust agencies have long recognized that joint purchasing involving agreements among competitors to acquire inputs can yield efficiencies and be procompetitive. As the DOJ and FTC explain in their Antitrust Guidelines for Collaborations Among Competitors, joint purchasing agreements "may be procompetitive . . . enabl[ing] participants to centralize ordering, to combine warehousing or distribution functions more efficiently, or to achieve other efficiencies."20 In the hiring context, employers are purchasers of a key input–labor. It follows that agreements among employers regarding the purchase of labor–including with respect to wages or benefits–could produce procompetitive effects ultimately benefitting consumers downstream. This potential impact arguably undermines the case for per se classification reserved exclusively for conduct where ill effects are inevitable.

The agencies attempt to bridge this important gap by stressing that the guidance applies only to "naked" wage-fixing and no-poaching agreements, and explaining in passing that "if [an] agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, [it] is deemed illegal without any inquiry into its competitive effects" and that "[l]egitimate joint ventures . . . are not considered per se illegal under the antitrust laws."21 While these clarifications are useful, they don't explain why inquiry into competitive effects is excluded. And this approach is in tension with the DOJ's own Competitor Collaboration Guidelines.

Conclusion

Wage-fixing and no-poaching agreements can–and often do–harm competition among employers for labor, resulting in lower wages or benefits for employees and harm to consumers in the form of reduced output or less innovation. But a per se, criminal approach is not justified and sound defenses to these claims exist.

John Taladay is Global Co-Chair of the Antitrust and Competition Law Practice at Baker Botts LLP and serves as the Chair of the Competition Committee of Business at OECD (BIAC). This article is based on an earlier article authored by Mr. Taladay and Vishal Mehta, Senior Associate at Baker Botts LLP.